Oil Price Shocks, Real Economic Activity and Uncertainty

Amélie Charles (1) , Chew Lian Chua (2) , Olivier Darné (3) , Sandy Suardi (4)

1 Audencia Business School
2 University of Nottingham Ningbo [China]
3 LEMNA - Laboratoire d'économie et de management de Nantes Atlantique
4 University of Wollongong [Australia]

This paper develops a structural factor vector autoregressive (SFVAR) model to study the effect of oil price shock on economic activity. The model allows both types of uncertainty (real economic activity and oil price) to directly affect oil prices and economic activity. More importantly, the factor variable, which is akin to the macroeconomic uncertainty measure of Henzel and Rengel (2017), captures the significant indirect spillover effects of both supplyrelated (oil prices) and demand-related (business cycle) shocks on oil prices and economic activity. By incorporating the indirect effect of this macroeconomic uncertainty, the response of economic activity to oil price shocks is amplified. In some countries the real effect is prolonged. Results for net oil exporting (importing) countries show that an oil price hike has an appreciably positive (negative) effect on economic activity. The factor dynamics of all countries, except for France, are highly correlated with each other, while they are all moderately correlated with some commonly used measures of macroeconomic uncertainty.

Keywords: Oil price uncertainty; Real Uncertainty; Impulse response; Outliers; Factor model

Domains: Humanities and Social Sciences; Economics and Finance

Amélie Charles, Chew Lian Chua, Olivier Darné, Sandy Suardi. Oil Price Shocks, Real Economic Activity and Uncertainty. Bulletin of Economic Research, 2021, 73 (3), pp.364-392. ⟨10.1111/boer.12252⟩. ⟨hal-03284089⟩